MAJOR HEADLINES – PREVIOUS SESSION
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Germany Jul. Preliminary Manufacturing PMI out at 445.2 vs. 42.0 expected and 40.9 in Jun.
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Germany Jul. Preliminary Services PMI out at 48.4 vs. 46.0 expected and 45.2 in Jun.
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Germany Jul. IFO out at 87.3 vs. 86.5 expected and 85.9 in Jun.
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EuroZone Jul. Preliminary Manufacturing PMI out at 46.0 vs. 43.5 expected and 42.6 in Jun.
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EuroZone Jul. Preliminary Services PMI out at 45.6 vs. 45.2 expected and 44.7 in Jun.
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UK Q2 GDP out at -0.8% QoQ vs. -0.3% expected
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UK May Index of Services out at -1.0% vs. -0.8% expected
THEMES TO WATCH – UPCOMING SESSION
(All times GMT)
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US University of Michigan Confidence (1400)
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US Treasury Secretary Geithner, Fed Chairman Bernanke, others testify on regulatory reform (1430)
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UK Jul. Hometrack Housing Survey (Sun 2350)
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Japan Jun. Corporate Service Prices (Sun 2350)
Market Comments:
EURUSD has seen a roller coaster performance over the last 24 hours. Yesterday it posted a new local high before fading somewhat and then being punished for a sharp turn southward after the US equity close when Microsoft and Amazon reported ugly results.
Then, the positive data this morning from Germany, including the better than expected IFO and less worse than expected preliminary manufacturing and services PMI numbers boosted the Euro strongly - almost enough to challenge yesterday's highs before fading a bit ahead of the US open. The Euro got some support as well from very ugly UK GDP data, which triggered a hefty round of EURGBP buying.
The commodity currencies continue to bask in current market conditions, though the Aussie has been a bit of a laggard, suggesting that it's time of outperformance is fading and possibly setting up for an across the board sell soon, if ever these equity markets get out of blind optimism/short squeeze mode - whichever the case may be. The Norwegian krone has joined the Canadian dollar with a very strong rally against the broader market. It is tough to discern the drive here, other than that both currencies' strength has coincided with this last leg of the equity market recovery and risk appetite. Further out, we would expect NOK to do better than CAD if/when risk aversion returns. CAD is reaching extreme valuation levels again vs. the greenback. The focus there shifts to the pivotal 1.0800 level. As for the NZD, the New Zealand minister of finance joins other NZ officials bemoaning the currency's strength, saying that the country needs a weaker exchange rate to help exports.
The consensus is spreading that there is something very unhealthy about the current equity rally. There has already been a lot of focus in the blogosphere indicating that the High Frequency Trading (HFT) phenomenon is a possible force for not so healthy price action and other issues in the markets. Now the story is spreading to the mainstream press - see the NY times article today ("Stock Traders Find Speed Pays, in Milliseconds"). It is beginning to feel like "something could blow" in equities if this move has been generated by unhealthy - not to say evil - market forces and if some new out of the box event or market force shakes up the way the HFT houses do business
So, while the economic calendar for next week is relatively light, we have the potential for a dramatic increase in market energy soon on signs that equity markets are on an unstable course and especially if the record auction size of US treasuries next week generates volatility in interest rates. In other words, while the Bernanke testimony so far has failed to provide a decisive pivot point for markets this week, there is still the strong chance that next week's market developments might shake us out of these summer doldrums. Stay tuned and be careful out there.
Chart: USDCAD
USDCAD has moved all the way back to the 1.0800 are in one fell swoop as oil prices have recovered strongly and as stock launched a monster rally over the last two weeks. This 1.08 level is a key support - having been close to the recent low as well as having provided resistance in the fall of last year until the Great Deleveraging sent the pair on a rocket ride to 1.3000.
